Apple Doubles Down on an Incredibly Risky Strategy

Reviews of the latest tech toys.
Sept. 10 2013 6:43 PM

The Cheap iPhone That Wasn’t

Apple still won’t compete for price-conscious consumers. That’s an increasingly risky strategy.

Apple employees walk towards the Apple Headquarters to attend Apple co-founder Steve Jobs' memorial service in Cupertino, California, on October 19, 2011.
The new iPhone 5C is definitely colorful. But is it a good deal?

Photo by Justin Sullivan/Getty Images

For the last six years, Apple has had a simple, increasingly risky plan for selling the iPhone. Every year, the company makes only one new model, a phone that represents Apple’s platonic ideal—the one phone it thinks everybody ought to have. Apple usually sells the new phone for around $650, and wireless carriers sell it to customers for $199 with a two-year plan. To hedge its bets against low-priced competitors, Apple also keeps selling its previous models, reducing the price of each by $100. Last year, when Apple unveiled the iPhone 5, it kept selling 2011’s iPhone 4S for $550 ($99 with a contract), and the 2010 iPhone 4 sold for $450 (free with a contract).

The advantage of this strategy is clear. Unlike its competitors, which make dozens of phones every year, Apple can focus its design and manufacturing energies on a single new model, and it can push customers to purchase its highest-end, highest-margin device. But the downside is clear, too. The iPhone is Apple’s biggest business, accounting for two-thirds of its profits. By releasing only one new phone every year, Apple keeps putting more and more of its eggs in a single basket. What if that basket has a buggy antenna? What if it doesn’t seem like much of an upgrade? What if its screen isn’t big enough for some customers? What if it’s just too expensive?

This year was supposed to be different. For months now, analysts have speculated that Apple would finally do what many observers (including yours truly) have long called on it to do—to diversify its iPhone lineup. The logic seemed obvious. Samsung, Apple’s fiercest rival, has been cleaning up in developing markets like India and China by offering models that cater to every market niche, from the low end to the high end. By making a new phone that sold for around $300 to $400 without a carrier subsidy—which is how many people in developing markets buy phones—Apple would be able to compete for price-conscious phone buyers, creating a whole new class of iPhone users who currently can’t afford Apple’s shiny baubles.

But today, Apple whiffed. At the company’s headquarters in Cupertino, Calif., CEO Tim Cook did unveil two new iPhones rather than just one. But neither of these phones is the cheap iPhone that people had been predicting. Indeed, Apple didn’t really change its pricing strategy in any meaningful way. Across the globe, it will still be charging the same for its phones as it always has. It’s not a stretch to say that instead of a good price, Apple is now offering budget-conscious consumers around the world a strange deal: OK, the iPhone isn’t any cheaper than it used to be. But hey, look, it comes in lots of colors! Colors! Even pink! How will you be paying?

The new top-of-the-line model—called the iPhone 5S—looks the same as today’s iPhone 5, but it’s got a faster processor, a better camera, and a fingerprint scanner that lets you unlock your phone much quicker than with a password. (I tried it out at Apple’s demo area and found it very easy to set up and speedy to use.) The 5S—which comes in black, white, and gold—will sell for $650, or $199 with a contract, the same as last year’s iPhone 5.

Then there’s the iPhone 5C—the long-rumored cheap iPhone that isn’t. It’s made of plastic instead of the aluminum found on the bigger iPhone. It comes in five colors: green, blue, yellow, pink, and white. Other than that, it’s got the same internals as the iPhone 5: same camera, same processor, same capabilities. And same price. Indeed, the 5C is so similar to the 5 that Apple is discontinuing that model. The 5C will sell for $550, or $99 with a contract. This isn’t a cheap phone. And if the 5C is cheaper for Apple to produce than the 5 would have been—which seems plausible given its plastic body—it might even be a way for Apple to boost its profit margins rather than scale them back.

This is a bold move. In the tech business, it’s rare—and perhaps even unprecedented—for a product to keep its prices steady year after year after year. By holding the line against lower-priced phones, Apple will be able to keep its profit margins high—and at Apple, profits are sacrosanct, considered more important than sales and market share. But refusing to give an inch on prices is also extremely risky. The next big phase of growth in the smartphone market is going to occur in places around the world where people don’t have a lot of money. What’s more, the utility of a $200 phone is quickly approaching that of a $550 phone. If you live in India and you’ve got only $300 or $400 to spend on a phone, the only iPhone you might be able to afford is the iPhone 4S—a 3-year-old device with a tiny screen. Or you can choose Google’s Nexus 4, which sells for $200, and is pretty fantastic in every way. In other words, at that price, you’d be a fool to get an iPhone. 

But if the 5C is not any cheaper than the 5 would have been, why did Apple go to all the trouble to make it? Why depart from the just-sell-last-year’s-model plan if the new device is pretty much the same as last year’s, only dressed up in a colorful new shell? I suspect it’s because Apple believes the colors will prove an important selling point. Yes, really.

Two years ago, I argued that one of Apple’s underappreciated skills is the way it cunningly plays with the colors of its devices in order to make old things look new. “Apple makes us covet certain colors today, while also making us scoff at the colors it convinced us to covet yesterday,” I wrote. “Every few years, it cycles through a new palette for its gadgets—it goes from white to black to multicolor to silver and back again. As it shifts, the whole gadget world moves along, too.” I ended that piece with a prediction. Because it would become increasingly difficult for Apple to change the design of the iPhone—you can’t do much with a slab of rectangular glass—the only element left to play with was the color. “A new color, for Apple, can represent as much of a reason to upgrade as a new processor,” I wrote, predicting that we’d soon see the iPhone come in a variety of colors.

And that’s what’s happening now. The iPhone 5C doesn’t do anything different from the iPhone 5. But because it looks different—because it comes in colors—Apple believes it can sell it as something new, something worthier of your attention than last year’s model. In India and China, Apple devices are often considered to be “Veblen goods,” meaning that they are attractive precisely because they are more expensive than rivals. Part of their appeal is the fact that you can’t afford them. The 5C’s colors make that exclusivity part of the sales plan: Here’s the new iPhone. Sure, it’s just out of your price range. But it’s colorful. Everyone will notice it. Surely you can save up for blue.

Correction, Sept. 11, 2013: A home page headline for this article stated that Apple claimed the iPhone 5C was a bargain phone. While there were pre-announcement rumors to that effect, low price wasn’t part of Apple’s pitch for the product.

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